Tiger Stripes Regained?

Indonesia's currency and markets may have been among this year's worst-performing, but at least one economist believes the archipelago's economy is poised to return to its Asian tiger growth rates.

"It went through a particularly severe adjustment during the crisis in 1997-98, and those adjustments have been reversed," said Tim Condon, chief economist for Asia, at ING.

But now, "the investment rate is rising, causing the current account deficit, but it will push (the country) back into growth," Condon said.

He expects growth in Indonesia's gross domestic product, or GDP, will return to 7-8 percent within the next five years. For the second quarter, Indonesia's GDP grew 5.81 percent on year, its slowest rate in three years; the central bank expects 2013 GDP growth of 5.8-6.2 percent.

Over the past few months, Indonesia has been buffeted by market volatility, spurred in part by concerns that the U.S. Federal Reserve's plans to begin tapering its asset purchases would make it difficult for the country to finance its current account deficit – 4.4 percent of GDP as of the second quarter. Shares are down more than 14 percent from their May peaks and its currency has lost nearly 18 percent of its value against the dollar year-to-date.

"It was a transitory state of the world in the middle of the year when there was almost a panic when current account deficits were (viewed as) bad. But the ordinary state of the world is that current account deficits are neither bad nor good. If they're produced because a country is investing a lot, then they're good and that's the story in Indonesia," Condon said.

A current account deficit "means the investment rate has gone up; there's more investment opportunities onshore than Indonesia can finance through their own savings. That's a good thing," he said.

He expects the Indonesian assets sold off will retrace their losses in the fourth quarter. He likes rupiah-denominated bonds and expects Jakarta shares to be one of the top performing markets in the quarter. He expects the rupiah to fall back below 10,000 to the dollar in 2014. It is currently around 11,300.

But Condon's view may be an outlier.

"I don't think over the next five years [Indonesia will] make significant strides" on structural issues, said Fred Gibson, an economist at Moody's Analytics. He forecasts GDP growth of 5.4 percent this year, which he see rising to 5.5-5.9 percent in 2014, before hitting a peak of 6.3 percent in 2015 and stabilizing around 6.2 percent thereafter.

"We don't see any sufficient structural trigger to believe the growth potential of the economy is sufficient for anywhere close to 7-8 percent. We would put the trend rate of growth in the order of 5.5 to 6 percent," said Robert Prior-Wandesforde, head of Southeast Asian economics at Credit Suisse.

While some economists suggested those growth rates before the recent slowdown, "the period of relatively rapid growth post-global financial crisis was largely a function of the commodity supercycle and increasingly ample liquidity. Both of those things have now ended and therefore were seeing a slowdown of growth from above-trend rates to below-trend rates," Prior-Wandesforde said.

He also doesn't believe the current account deficit suggests investment growth.

"The current account deficit is not so much a function now of strong imports; it's a function of incredibly weak exports. It's also clear that when capital imports were strong, they largely reflected companies' attempts to meet domestic demand, rather than to establish strong export bases," he said.

But he noted, "a 5-6 percent growth rate is not bad."

He expects the rupiah will soften a bit further, falling to around 11,800 against the dollar in 12 months. "It doesn't seem particularly cheap; it's roughly fair value," he said. "It may be difficult to entice foreign investors into the bond or equity markets in that context."